Background
Payward (“First Claimant”) & Payward Ventures (“Second Claimant”) are Delaware corporation and Payward Ltd (“Third Claimant”) is an England Corporation. All three Claimants belong to same corporate group with headquarters in San Fransico, California. Mr. Chechetkin (“Defendant”) is a British citizen, residing in England. He is a qualified lawyer in Russia, working in the capacity of in-house legal counsel with European Bank for Reconstruction and Development (“EBRD”) until 31 December 2021. After this, he has been unemployed.
In 2017, Defendant opened an online trading account via the Kraken website by filling out a standard one-line form. As part of the onboarding process, the form required answer to various questions such as net worth, source of wealth, occupation etc. The answers to these questions were reflected in a “T4 risk score”, along with other items. Defendant’s T4 risk score was accepted and was inducted as a customer with a “Pro” account. This was when a contract concluded between Respondent and Third Claimant (local entity in England), as per the Payward Terms of Service set out in a clickwrap agreement (“Agreement”). The Agreement included an arbitration clause under JAMS Rules, with seat and governing law of San Francisco, California and also excluded the applicability of conflict of laws principles.
Although the Defendant was active from 2017, the dispute between the parties arose from deposit of £613,000 made by Defendant between March and June 2020. As per the Defendant, he engaged in margin trading on the platform and allegedly lost over £608,000. These deposits were made by payments from his UK bank account to the UK bank account of Payward Ltd.
On 12 April 2021, Defendant notified its intention to bring a claim against Third Claimant in English High Court. The Claimants responded by referring to arbitration clause. In response dated 26 July 2021, Defendant alleged that the Third Claimant was dealing in investments which are regulated activities under Financial Services and Markets Act 2000 (“Markets Act”), requiring an authorisation. However, Third Claimant did not have such authorisation. Thus, the Agreement including arbitration clause is unenforceable in view of Consumer Rights Act 2015 (“CRA”) and Section 26 of Markets Act.
Subsequently, the Defendant commenced proceedings in English High Court, making all the three Claimants as the defendant, but made allegations only against the Third Claimant. On 21 June 2022, the Claimants filed an application disputing English Jurisdiction. The High Court on 25 October 2022, rejected the jurisdiction challenge by the Claimants.
In the meanwhile, arbitration proceedings were commenced by the Claimants. In the first procedural order dated 31 May 2022, the Sole Arbitrator gave directions for pleadings etc. and rejected the Defendant’s request to stay the arbitration till the jurisdictional challenge is decided, without furnishing reasons. On 24 June 2022, Defendant submitted a formal motion, contending that the Clause 23 (arbitration clause) was unenforceable under Markets act and that Clause 23 violated JAMS Consumer Arbitration Minimum Standards. On 29 July 2022, the Sole Arbitrator passed a Partial final award against the Defendant only noting that the said provision was sufficiently brought to the notice of the Defendant and Defendant consented to the same. The Sole Arbitrator did not delve on the other points raised by the Defendant.
Consequently, the arbitration proceedings continued and culminated in a final award dated 18 October 2022. The Sole Arbitrator rejected the Claimant’s contention that the arbitration proceedings is not a consumer arbitration, found the Defendant in breach for pursuing proceedings in High Court, held that Defendant was not entitled to repayment of £613,000 andalsoenjoined the Defendant from pursuing any court proceedings.
The Claimants sought to enforce the award, which was objected by the Defendant on the ground of public policy, being in violation of CRA and Markets Act, and that Final Award dealt with a dispute beyond the scope of the submission to arbitration.
Issues and Decision
Whether Defendant was a ‘Consumer’ under Consumer Rights Act, 2015?
The Defendant argued that Respondent qualified as a consumer under Section 2(3) of the CRA, which defines a consumer as an individual acting for purposes wholly or mainly outside his trade, business, craft, or profession. Relying on Ang v Reliantco Investments Ltd and Weco Project ApS v Loro Piana, wherein a person with more substantial means and more familiarity with cryptocurrency then the Defendant herein was held to be consumer under Brussels law, even though concept of a consumer under the CRA is broader than in the Brussels Law because the statute expressly recognizes that individuals may act in more than one capacity through the words “wholly or mainly.” Consequently, even where an individual engages in activities with a profit motive, he may still remain a consumer provided those activities are mainly outside his professional sphere.
The Defendant further contended that the relevant assessment must be conducted at the time the contract was concluded. This position was supported by Section 62(5)(b) of the CRA, which requires fairness to be assessed by reference to the circumstances existing when the term was agreed. The Defendant further supported its case by relying upon Mr. Chechetkin’s own evidence. Mr. Chechetkin admitted that his sole profession and full-time occupation was that of a lawyer, which constituted his primary source of income. At the time of opening his Kraken account in March 2017, he disclosed that he had no prior experience in cryptocurrency trading and did not work in the cryptocurrency or fintech sectors. He was accordingly assessed by Kraken as an individual customer. Further, he confirmed that he was neither acting on behalf of a third party nor intended to resell assets, as otherwise he would have been required to open a corporate account. These facts, according to the Defendant, demonstrated that Mr. Chechetkin was acting in a personal capacity and therefore qualified as a consumer.
On the contrary, the Claimant argued that the Defendant was not a consumer within the meaning of Section 2(3) of CRA. It contended that his pattern of cryptocurrency trading demonstrated a level of knowledge, experience, and sophistication inconsistent with that of an ordinary consumer. Particular emphasis was placed on the frequency of his trading activities, especially during 2020, and the relatively substantial sums involved. According to the Claimant, these factors showed that Mr. Chechetkin was engaging in cryptocurrency trading as a means of generating income to support himself and his family. The Claimant further relied on the fact that some of the funds invested had been provided by Mr. Chechetkin’s parents and that he had stated in evidence that he declared the profits from his trading activities for tax purposes.
The Court held that the Defendant was a consumer for the purposes of the CRA and considered the issue relatively straightforward in light of the evidence. The Court accepted that the proper time for assessing consumer status was when the contract was concluded, namely March 2017. At that time, Mr. Chechetkin’s sole profession was that of a lawyer. He had identified his legal employment as his source of income, disclosed that he had no experience in cryptocurrency trading, and confirmed that he was not acting for a third party or operating a business through the account. These facts strongly indicated that he was acting in a personal capacity. The Court further drew an analogy with individuals who engage in betting or gambling with the hope of making money; such persons do not thereby become professional gamblers.
Whether the JAMS arbitration award is in violation of public policy, hence should be refused enforcement?
The Court held that the CRA and the Markets Act are expressions of UK public policy. The CRA implements important consumer protection principles and requires courts to independently examine the fairness of consumer contract terms, even where the parties themselves do not raise the issue. Similarly, the Markets Act reflects Parliament’s policy of regulating financial services, protecting consumers, and preventing unauthorised financial activities.
The Court found that enforcement of the arbitral award would be contrary to UK public policy for several reasons.
First, enforcement would prevent the Court from examining the fairness of Clause 23, despite the mandatory obligation imposed by Section 71 of the CRA. If the award is enforced, the fairness of the clause would never be considered by an English court.
Second, enforcement would undermine Section 74 of the CRA. Although the contract had a close connection with the United Kingdom, the arbitrator applied only Californian law and ignored the protections available under English consumer law. The Court held that Parliament intended UK consumers to benefit from the protections of the CRA irrespective of a contractual choice of foreign law.
Third, the Court concluded that Clause 23 was likely unfair under Section 62 of the CRA. The clause required disputes to be resolved through arbitration in California under the JAMS Rules. This placed Mr. Chechetkin in a significantly less favourable position than if the dispute had been resolved in England. He was required to engage US lawyers, incur substantial costs, and pursue his claims before an arbitrator unfamiliar with English consumer and financial services law. Further, the English courts had no supervisory jurisdiction over the arbitration and could not correct any errors of English law.
Finally, enforcement of the award would effectively prevent Mr. Chechetkin from pursuing his claims under the FSMA. The Court observed that he had at least a prima facie claim that Payward had carried on regulated activities in the UK without authorisation. Enforcing the award would therefore frustrate the consumer protection and regulatory objectives of the FSMA, including the policy that agreements entered into in breach of statutory requirements should be unenforceable and that affected consumers should be able to recover their losses.
Accordingly, the Court held that enforcement of the arbitral award would be contrary to UK public policy and refused enforcement under Section 103(3) of the Arbitration Act 1996.
Case Details
Citation Code : [2023] EWHC 1780 (Comm)
Date of Judgement: 14 July 2023
Court: The High Court of Justice, King’s Bench Division, Business and Property Court of England and Wales, Commercial Court
Bench: Mr. Justice Bright
Author(s)
Ankita Kumari
Student at Savitribai Phule Pune University